These two posts have a long explanation of monetary theory in general, and modern monetary theory in particular. It’s a little over my head, although I like challenging myself to try to understand it. It is a very abstract system to try to understand. I think that if you can understand monetary policy, you might have a chance to understand what money actually is. And if enough people understand it, they might stop believing in it and the world might end.
Basically, as I understand it, the government prints money (i.e., borrows money from itself) and spends it, usually more than it takes back in taxes, and this creates a surplus in the private sector. It can control the money supply by changing the amount it borrows and spends, or by changing the tax rate. I think what people find scary about “modern monetary theory” is that it suggests money doesn’t have to be taken seriously and any needed amount can just be printed any time. This is why politicians generally have not been given the keys to the printing press.
I have a metaphor in my mind of the real economy as a machine with pistons and gears turning. The fuel for the machine is maybe human effort and ideas (and some actual fuel). But the gears will grind without grease, so you have to lube it up. Not enough and the system will shut down violently. Adding extra will not make the machine turn faster, but it will not do any serious harm other than maybe a gunky mess someone has to clean up. Better to use a little too much lube than not enough. The lube for the economic machine is money.
There were a few other interesting things in the articles that I didn’t know or hadn’t thought about recently. It refers to the late Wynne Godley at Cambridge University as the “father of stock-flow consistent modeling”. I think a few people in a few different disciplines might claim that mantle, but that is the neat thing about system theory, it’s interdisciplinary. There is a certain irony if anyone is into it and doesn’t realize it is interdisciplinary.
There is a free(?) system dynamics system called Minsky, something like Stella but tailored specifically to finance and economics. Matlab also has a sort of stock-flow simulation module call Simulink that I hadn’t heard of. I am still waiting for that system dynamics R package.
The Minsky model also made me think of the late Jay Forrester, who advocated for a long time for stock-flow modeling in economics.
Traditional mainstream academic economics, by trying to be a science, has failed to answer major questions about real- life economic behavior. Economics should become a systems profession, such as management, engineering, and medicine. By closely observing the structures and policies in business and government, simulation models can be constructed to answer questions about business cycles, causes of major depressions, inflation, monetary policy, and the validity of descriptive economic theories. A system dynamics model, as a general theory of economic behavior, now endogenously generates business cycles, Kuznets cycles, the economic long wave, and growth. A model is a theory of the behavior that it generates. The economic model provides the theory, thus far missing from economics, for the Great Depression of the 1930s and how such episodes can recur 50–70 years apart. Simpler system dynamics models can become the vehicle for a relevant and exciting pre-college economics education.
Jay Forrester, quoted in a blog called Viewpoints that Matter (including the blogger’s viewpoint, presumably)
Imagine if the average high school graduate really had an intuitive understanding of how important systems like the economy are structured and why they function the way they do as a result. The world might be a different place.
I’ve been working on one more metaphor for awhile. Maybe the real economy is like a tightrope, and the financial economy is like a safety net stretched above a concrete floor. If we use too much food, water, energy, saturate the atmosphere and ocean with our waste, etc. we will fall off the rope. Hitting the concrete floor would be a failure of the real economy like starvation or freezing to death. The safety net would be a spike in prices for food or energy that slows down the economy short of (most people, right away) actually dying of exposure. The fall would still be very painful and you might break bones or even your neck if you fall just the wrong way. What about something like nuclear proliferation or all the ice in Antarctica suddenly melting? I don’t know, maybe dry rot in the old net that we are failing to do anything about. No price signal is going to save us from those.